High-Yield Preferred Stock in a Low-Rate Environment: Evaluating Annaly Capital's NLY-J as a Call-Protected Income Play

In an era where central banks are poised to ease monetary policy, investors are increasingly turning to high-yield preferred stocks as a hedge against declining interest rates. Among the most compelling options is Annaly Capital Management's 8.875% Series J Preferred Stock (NLY-J), a call-protected instrument that offers a rare combination of stability and income in a market starved for yield. With the Federal Reserve expected to cut rates in late 2025 and early 2026, NLY-J's five-year call protection and fixed dividend rate position it as a standout play for income-focused investors.

The Case for Call-Protected Preferred Stocks

Preferred stocks, particularly those with call protection, have long been a staple for investors seeking consistent dividends in low-rate environments. Unlike common stocks, preferreds typically offer fixed dividends, and call protection ensures that the issuing company cannot redeem the shares for a set period—usually five years. This feature is critical in a rate-cutting cycle, as it locks in the investor's yield and prevents forced reinvestment at lower rates.

NLY-J, which carries a fixed coupon of 8.875%, is currently trading at a yield that dwarfs most corporate bonds and Treasuries. Its call protection until 2030 (assuming issuance in August 2025) means Annaly cannot redeem the shares until 2030, shielding investors from the risk of early redemption during a period when rates are expected to fall. This is a significant advantage over non-call-protected preferreds, which could be called by issuers as soon as rates dip below their coupon rates.

Fed Easing and the Preferred Stock Landscape

The Federal Reserve's anticipated rate-cutting path, as outlined by J.P. Morgan Research, adds further weight to NLY-J's appeal. The central bank is expected to cut rates by 25 basis points in December 2025, followed by three more 25-basis-point cuts in early 2026. While these cuts are modest, they signal a shift toward accommodative policy, which typically boosts the valuations of fixed-income assets.

Preferred stocks, especially those with fixed rates, tend to outperform in such environments. As the Fed lowers rates, newly issued preferred shares will carry lower coupons, making existing high-yield instruments like NLY-J more attractive. The call protection ensures that investors can hold onto their 8.875% yield even as the market adjusts to lower rates.

Annaly's Strategic Positioning

Annaly Capital, a leading mortgage real estate investment trust (REIT), has a history of leveraging preferred stock to fund its capital-intensive business model. The proceeds from NLY-J will be used to acquire Agency MBS pools, mortgage servicing rights, and other residential credit assets—sectors that benefit from low interest rates. This alignment with the Fed's easing cycle creates a virtuous cycle: lower rates boost the value of Annaly's assets, which in turn supports its ability to pay dividends on preferred shares.

Moreover, the company's strong balance sheet and consistent dividend history (it has paid dividends on preferred shares for over a decade) reduce the risk of default or dividend cuts. While preferred stocks are not without risk—market volatility and credit concerns can impact prices—Annaly's track record and the current economic backdrop make NLY-J a relatively safe bet.

Risks and Considerations

No investment is without risk. NLY-J's performance could be dented by a sharp rise in interest rates, though the Fed's easing path makes this scenario unlikely. Additionally, a deterioration in Annaly's credit profile or a downturn in the mortgage REIT sector could pressure the stock. Investors should also consider the stock's liquidity, as preferred shares can sometimes trade at discounts or premiums to their liquidation value.

Conclusion: A Strategic Income Play

For investors seeking to preserve yield in a low-rate world, NLY-J offers a compelling case. Its 8.875% coupon, five-year call protection, and alignment with the Fed's easing trajectory make it a rare combination of income and stability. While preferred stocks are not for the risk-averse, NLY-J's structural advantages and Annaly's strategic positioning make it a standout option for those willing to accept the inherent risks of the asset class.

As the Fed inches closer to its rate-cutting phase, the window for locking in high yields through call-protected preferreds like NLY-J is narrowing. For income-focused investors, the time to act may be now.